2012 OASDI Trustees Report

Under current law, the projected cost of Social Security generally increases faster than projected income because of the aging of the baby-boom generation, continuing low fertility since the baby-boom period, and increasing life expectancy. Based on the Trustees’ best estimate, program cost exceeds non-interest income for 2012, as it did for 2010 and 2011, and remains higher than non-interest income throughout the remainder of the 75‑year projection period. Social Security’s combined trust funds increase with the help of interest income through 2020 and allow full payment of scheduled benefits on a timely basis until the trust funds become exhausted in 2033. At that time, projected continuing income to the trust funds equals about 75 percent of program cost. By 2086, continuing income equals about 73 percent of program cost.

The Trustees project that the OASI Trust Fund and the DI Trust Fund will have sufficient assets to pay full benefits on time until 2035 and 2016, respectively. Legislative action is needed as soon as possible to prevent exhaustion of the DI Trust Fund. In the absence of a longer-term solution, lawmakers could reallocate the payroll tax rate between OASI and DI, as they did in 1994.

The Trustees estimate that the 75-year actuarial deficit for the combined trust funds is 2.67 percent of taxable payroll — 0.44 percentage point larger than the 2.22 percent deficit in last year’s report. For the combined OASI and DI Trust Funds to remain solvent throughout the 75-year projection period, lawmakers could: (1) increase the combined payroll tax rate during the period in a manner equivalent to an immediate and permanent increase of 2.61 percentage points1 (from its current level of 12.40 percent to 15.01 percent); (2) reduce scheduled benefits during the period in a manner equivalent to an immediate and permanent reduction of 16.2 percent; (3) draw on alternative sources of revenue; or (4) adopt some combination of these approaches.

If lawmakers do not take substantial action for several years, then changes necessary to maintain Social Security solvency will be concentrated on fewer years and fewer generations. Lawmakers will have to make large and sudden changes if they defer action until the combined trust funds become exhausted in 2033. For example, either of the following two actions would eliminate the shortfall for the 75-year period as a whole by specifically eliminating annual deficits after trust fund exhaustion:

The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes and give workers and beneficiaries time to adjust to them. Implementing changes soon would allow more generations to share in the needed revenue increases or reductions in scheduled benefits. Social Security will play a critical role in the lives of 56 million beneficiaries and 159 million covered workers and their families in 2012. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.

The necessary tax rate of 2.61 percent differs from the 2.67 percent actuarial deficit for two reasons. First, the necessary tax rate is the rate required to maintain solvency throughout the period that does not result in any trust fund reserve at the end of the period, whereas the actuarial deficit incorporates an ending trust fund balance equal to 1 year’s cost. Second, the necessary tax rate reflects a behavioral response to tax rate changes, whereas the actuarial deficit does not. In particular, the calculation of the necessary tax rate assumes that an increase in payroll taxes results in a small shift of wages and salaries to forms of employee compensation that are not subject to the payroll tax.